The End of the Communist Dynasty

[BadJuju]

Re: The End of the Communist Dynasty

I nominate that one as most excellent iTulip bad pun for July.

[cobben]

Re: The End of the Communist Dynasty

iTulip has been consistently expecting some form of property bubble bursting in China - however this is a far cry from a full scale Ponzi which is what Tindale, Mish, and israelfinancialexpert are saying, the latter two both being 'Austrians'.

The Chinese do seem to be building "Ponzis all the way down" (not turtles, perhaps unfortunately).

Pettis does not seem to even mention the "war" solution favored(?) by jk (except in a footnote, just added), I have no idea why.
It could well negate his unmotivated assumption:
"The alternative – that the household share of GDP continues to decline as depositors subsidize rapid GDP growth and even more capital misallocation – simply cannot be sustained."

A long somewhat rambling and academic ("In the long run everything must balance" ) article.

What is financial reform in China?

. . .

But the case of China, and every other case of an investment-driven growth miracle, suggests that the model cannot be sustained indefinitely because there are at least two constraints. The first has to do with the constraint on debt-financed investment and the second with the constraint on the external account, and one or both constraints have always eventually derailed the growth model.

. . .

This it seems brings us full circle to the beginning of the newsletter. Liberalizing interest rates means that those sectors of the economy who have benefitted from very low lending rates – SOEs, local and municipal governments, real estate developers, and other large borrowers – are likely to find many reasons to oppose interest rate liberalization. Likewise corporate governance reform is also likely to be opposed by a number of very powerful interests.

So how will banking reform in China turn out? In the long run everything must balance, and one way or another financially repressed interest rates must adjust. One way this can happen is through a sharp increase in interest rates, but it is important to remember, as Japan showed us, that it can also happen by a collapse in GDP growth rates. In either case the spread between the nominal growth rate and the nominal lending rate contracts, and so the extent of financial repression is sharply reduced. The alternative – that the household share of GDP continues to decline as depositors subsidize rapid GDP growth and even more capital misallocation – simply cannot be sustained.

. . .

[*] The German experience, of course, ended in war, and not in a debt crisis, but according to Yale historian Adam Tooze, the German invasion of eastern Europe occurred three or four years earlier than the military command was prepared largely because the country was almost insolvent and could not afford to wait any longer. See Adam Tooze, The Wages of Destruction: The Making and Breaking of the Nazi Economy, London: Allen Lane, 2006

[jk]

Re: The End of the Communist Dynasty

So you are envisioning more and more proxy wars where the US and China get bogged down into a long-term cold war scenario? The US gets to put its people's minds off of the crap back home while China gets to cull its male-heavy, huge population in the grind of endless proxy wars for resources and clout.

yes that seems like a real possibility to me. "solves" a lot of problems [for the leadership] on both sides.

[Finster]

Re: The End of the Communist Dynasty

But will the people of the US be willing to engage in another cold war? People are absolutely sick of the wars in the US.

They seem to be more tolerant of cold wars than the other kinds.

[thriftyandboringinohio]

Re: The End of the Communist Dynasty

They seem to be more tolerant of cold wars than the other kinds.

But we've been in two shooting wars continuously over the past 11 years. Who knows where the public threshold is?

[cobben]

Re: The End of the Communist Dynasty

AEP referenced this in his China bash piece.

"Ponzis all the way down" - and sideways, too?



10 signs of economic trouble that China’s official data won’t tell

7. Macau casino revenue growth stalled, then crashed

Source: Gaming Inspection and Coordination Bureau, Statistics and Census Service, National Bureau of Statistics



9. The arcane corners of (shadow) banking: Credit crisis in Zhejiang which pulls 600 companies into it

One company in Zhejiang of China gone bust. It wasn’t a big deal, until it is. It turns out that a lot of small and medium sized companies rely on “credit guarantors” to obtain bank credits. While normally you would think that such guarantors are some independent third party performing such service, it turns out that these companies in Zhejiang simply guarantee each other. So when one company went bust, banks pulled loans from every company that are guaranteed by the company that has gone. As the chain of guarantees continue to be exposed, it turns out that more than 600 companies are in it, and banks are trying to pull loans from all of these companies.

[jpatter666]

Re: The End of the Communist Dynasty

But we've been in two shooting wars continuously over the past 11 years. Who knows where the public threshold is?

Draft-level.

[thriftyandboringinohio]

Re: The End of the Communist Dynasty

Draft-level.

+1

[jk]

Re: The End of the Communist Dynasty

otoh, it's the solution to the unemployment problem both here and in china

[BadJuju]

Re: The End of the Communist Dynasty

otoh, it's the solution to the unemployment problem both here and in china

I am not sure a draft would be necessary. The military has had to basically turn people away in the US because of record recruiting numbers. Back during Iraq, you could be a raving maniac. These days, if you have a stubbed toe and a runny nose, you are out.

[jk]

Re: The End of the Communist Dynasty

I am not sure a draft would be necessary. The military has had to basically turn people away in the US because of record recruiting numbers.

i didn't mean to say there would be a draft. i'm saying that high unemployment means more people want to "volunteer" for the military.

[BadJuju]

Re: The End of the Communist Dynasty

i didn't mean to say there would be a draft. i'm saying that high unemployment means more people want to "volunteer" for the military.

Oh, definitely.

[c1ue]

Re: The End of the Communist Dynasty

the "solution" is to turn china toward a war economy.

i suggested this in my post of 11-14-10

My view is that while the US is agitating for a new Cold War, China is not.

My understanding is that the CCP is actually the one holding back the nationalist sentiments of the crowd of young single men. When necessary, it allows their exuberance to pop up, but in general they realize full well the dangers of letting that mob get its head.

Certainly if the economic situation gets bad enough, this may change. However, I have yet to see any type of definitive evidence that the bubble bursting in China is going to be as bad as the AEPs, Mishs, and various other Austrian doom and gloomers say.

I still look forward to reading the narratives coming from these types, but perhaps I am overly spoiled by the depth and breadth of analysis behind the iTulip thesis.

The doom and gloom scenarios - even if they come true - don't have the same quality of data or analysis behind them.

[jk]

Re: The End of the Communist Dynasty

China’s ’1 per cent’ risk

Posted by Izabella Kaminska on May 23 15:11.FT Alphaville has been focusing on signs that China may be suffering a “capital outflow” problem.
We also think global markets may be under appreciating the problem.
As far as we see it, markets have become far too used to a one-way discourse when it comes to China. They presume capital only goes in one direction. Into China.
This is understandable given that Chinese authorities (for years) have been intervening in foreign exchange markets to stop inflows from influencing the yuan’s value, a move designed to keep the yuan structurally undervalued and China competitive in global trade.
It’s actually a very similar situation to what the Swiss are doing now. By enforcing a 1.20 CHF/Eur floor the SNB is keeping the Swiss franc structurally undervalued much in the same way. Everyone knows that without the SNB’s intervention the franc would trade much stronger.
But stopping capital outflows from influencing the exchange rate is much harder. For one thing, it takes plentiful foreign exchange reserves.
Indeed, if capital outflows are large enough, the “peg” (or floor) not only becomes extremely expensive to manage, it eats ever more severely into your foreign exchange reserves.
Once your reserves run out, meanwhile, the game is largely over. Just ask George Soros about how the mispricing of the pound in the ERM led to the infamous “breaking” of the Bank of England.
Of course, when it comes to China, the going opinion is that China’s reserves are so large, there is no risk at all that the People’s Bank of China can be broken in the same way.
But that’s forgetting that when it comes to its foreign exchange reserves China sits between a rock and a hard place. Its Treasury position is so large, any liquidation could risk the country becoming the US Treasury market (and just ask JP Morgan about that…) killing value for China as well as for the world’s US bond investors.
Accordingly, it’s much easier for China to simply abandon the peg if the outflow problem persists.
This is especially the case if it can dress up the whole affair as an “empowering” move, attracting international headlines like this and this. Furthermore, if by “opening up the RMB” it can encourage more investment or settlement in RMB — a move which would be naturally supportive for the renminbi — without having to compromise on competitiveness.
Nevertheless, until the RMB becomes fully internationalised, capital outflows do remain a risk for China’s national cash pile.
And on that note, we found some of the points raised in this 2011 paper by Victor Shih from Northwestern University extremely insightful.
For one thing, did you know that China’s wealthiest 1 per cent could determine everything?
Consider the following points (emphasis ours):

China in fact faces three major structural causes of capital flight.
First, the empirical portion of this paper will conduct three calculations to show that the wealthiest 1% households in China commands wealth that is at least as large as 2/3 of the foreign exchange reserve and possibly as high as nearly twice its size.
Thus, if the top 2.1 million households in a nation of 1.3 billion people decide to move even 30% of their wealth overseas, the foreign exchange reserve will reduce by a trillion dollars or more.
Second, despite official foreign exchange control, numerous channels, especially those through China’s current account, exist to move capital in and out of China.
Third, households, which are net savers, face a negative 3 plus percent in real return from bank deposits and Chinese treasury bonds, forcing them to constantly look for higher returns than inflation rates.
These three conditions combine to create extremely fragile conditions for China’s foreign exchange reserve, which is the backbone of the entire financial system of China.
If the foreign exchange reserve is depleted by capital flight, the central bank will need to resume large scale money creation, as it did in the 1980s and the 1990s, to maintain the solvency of the banking sector (Walter and Howie 2011; Shih 2004).

Which means it’s worth knowing just how wealthy China’s wealthiest 1 per cent really are?
As Shih observes, if wealth is fairly distributed across the nation, it would be much more difficult to deplete the equivalent of the national reserves. On the flip side if these households’ wealth totals well above China’s $2.8tn foreign exchange reserve, it would only take the partial reallocation of their wealth overseas to cause a substantial depletion of its cash pile.
Thus:

Even when there is capital control and the state’s propaganda machinery instills confidence in the vast majority of the population, panic even among a subset of this richest—and also the most knowledgeable– set of insiders may have an enormous impact on the foreign exchange reserve.

Got any anecdotal reports of wealthy Chinese billionaires banging on your door to give you money?
As an aside, we hear there are some interesting developments in Macau already.
http://ftalphaville.ft.com/blog/2012...per-cent-risk/

[cobben]

Re: The End of the Communist Dynasty

"If the foreign exchange reserve is depleted by capital flight, the central bank will need to resume large scale money creation"


Tindale sees the possibility of hyperinflation in China:

" . . .
China can be seen through the Minsky credit stages. Faced with 2008 the Chinese central banks moved from speculative phase to ponzi phase'. As Minsky model predicted the Chinese have flushed their internal market with credit, which in order to get traction to offset the 2008 GFC was invested in building. Asset appreciation that is induced by monetary stimulus through the real estate transmission mechanism of the credit channel provides only short-lived prosperity (it doesnt take long to build stuff but the stuff that gets built rarely attracts rents and therefore is not a real increase in wealth ). The RE credit channel only works for extended periods if the percentage of existing equity is relatively high (like 2000 in the west) when you begin with strong equity , if its applied to a relatively much smaller market (China ) there is no home equity ATM withdrawal because RE is being used as a store of wealth not like in the west where consumers withdraw equity through debt then consume.

If the world then chokes the Chinese export revenue through austerity, then the classic conditions exist where the Chinese central bank either destroys the yuan or creates a Chinese depression. Then the commodity countries like Canada and Australia will get sucked under. The communist party is in deep trouble, again centrally planned economies never succeed, its ironic that one of Marx's greatest warnings was about the ursurping of industrial capitalist by financial capitalists, the communists should have read Marx more thoroughly.



Remember nearly all hyperinflations occurred when a country currency was printed to procure either Stirling, USD or gold."



corporate China is short US dollar